When the stock market turns down, many people panic and pull out their cash while legendary investors like Warren Buffet start sticking their cash into the market. So how to invest in a bear market becomes the hot topic – how can you invest during a bear market without going completely batty and panicking? The steps outlined below will help you invest your money during a bear market.
First Things First, What Is A Bear Market?
A bear market is typically defined as a period of negative returns in the broader market to the magnitude of between 15-20% or more.
I sense a bear market is about to occur what should I do?
If you have not lost your shirt yet and you’re pretty convinced we’re headed for a bear market – one train of thought is to completely liquidate your assets and be prepared to re-invest once the market has stabilized (15-20% lower) and then re-invest at the lower price or hold it in cash.
I Want to maintain a position in the market – where should I move my money?
For those individuals who want to maintain a position in the market you should take a defensive position. This type of strategy usually involves moving your money into large companies with strong balance sheets. Companies that make money in a bear market are companies who are staples of everyday life such as General Mills, Kraft and GE. Regardless if the stock market is down, we people will still brush their teeth and eat dinner – meaning these bigger companies will continue to pull in the revenue.
What About Investing in a Bear Market Mutual Fund?
Although it may sound tempting to invest in a bear market fund, it is typically more risky than moving into defensive stocks. Bear market funds will invest in derivatives or short stocks. While these techniques will definitely work in a true bear market, they are riskier and could leave you with large losses if the market rebounds faster than anticipated. A defensive position is the safer bet.
Cash Is King – Don’t be afraid to sit on it!
Just remember cash is king. You may miss out on one or two investments and great returns, but if you’re skeptical and not sure where the market is going, pull out your cash and sit on it until you find the right opportunity. There is nothing worse than being down 25% on an investment and you need your cash. When stocks are falling by 10 or 20 percent, you are much better off earning a low-percentage interest in a secure and stable investment money market or CD.
Using Trailing Stops
Trailing stops is just the active use of stop loss orders on a given stock. In the case of a bear market, you set your stop losses close to the stock’s market price (“tighten the trail”).